After 10 years in business, the Garza family sold their company Siete Foods to PepsiCo (NASDAQ: PEP) for a cool $1.2 billion. The deal for Siete was announced back in October but closed this January. Pepsi is an enormous business, and for it $1.2 billion is relatively small. But any purchase over $1 billion is still noteworthy.
The surprising thing for some investors may be that Siete Foods doesn’t have a single beverage in its product portfolio, let alone any carbonated beverages. Rather, the company makes food products that cater toward people looking for grain-free and dairy-free options in Mexican-American food.
The acquisition of Siete Foods dovetails nicely with Pepsi’s November acquisitions of Sabra and Obela. Pepsi had already owned half of both joint ventures but moved to acquire the rest, bringing more food products into Pepsi’s portfolio.
If it’s surprising to you that Pepsi is acquiring food companies, then it’s likely that you don’t understand Pepsi’s business. In fact, food products are one of the best reasons to invest in the company today.
Over the last 12 months, Pepsi has generated revenue of over $90 billion. But a relatively small percentage of this is attributable to beverage sales in North America. In the company’s fiscal third quarter of 2024 (which ended in early September), the North American beverage division only accounted for 31% of the business.
Nearly as big as beverages, 28% of Pepsi’s Q3 revenue came from snacks and food in North American markets. The company generates the remainder of its sales from food and beverages in international markets.
However, snacks and food in North America are the more important parts of Pepsi’s business, because they’re more profitable by a mile. The company’s North American Frito-Lay division alone accounted for 39% of its total Q3 operating profit; in comparison, just 24% of operating profit came from the North American beverage unit.
To drill down further, Pepsi’s Quaker Foods division in North America is small at just 3% of the company’s overall revenue in Q3. But again, it commands better profits. Quaker Foods in North America had a Q3 operating margin of 15%, compared with just an 8% margin for beverages in North America.
Given the size of Pepsi’s non-beverage portfolio and looking at the margins, it’s not surprising that the company is doubling down with acquisitions such as Sabra and Siete Foods. It’s good business.
When it comes to investing in Pepsi stock, it’s important to have realistic expectations. Over the last 10 years, Pepsi has averaged only a 7% annual gain, according to Macrotrends. Returns were positive, which counts for something — but they weren’t anything to write home about.
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